A lot is happening this week, including lots of data, plus Powell, plus the ECB, and one more thing: Broadcom earnings. We used to care about Broadcom because it was signal for Apple and other Apple suppliers. Now, Broadcom has seen its market cap rise to $650 billion, surpassing Tesla.

Seeing what Broadcom says when they report on Thursday after the close will be interesting. The company is expected to see fiscal first quarter 2024 earnings climb by 85 bps -- yes, 0.85%, as in <1%, to $10.42 per share on revenue growth of 29.9% to $11.6 billion. For the second quarter, the company is expected to see earnings grow by 8.8% to $11.22 per share, with revenue growth of 37.1% to $11.9 billion.

The growth isn’t driven by their chip side (AI) of the business, because semiconductor solutions is growing by 8.3% to $7.7 billion this quarter, and by 12.7% next quarter to $7.7 billion. The growth comes from their software business, rising by 124.6% to $4.0 billion and 140.1% next quarter to $4.6 billion. 

Remember this is a company that bought the old Computer Associates years ago, and it has made other questionable acquisitions to try and diversify its chip business and increase margins. Additionally, they just recently completed a purchase of VMware, which is driving much of the year-over-year revenue growth.

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Image Source: Bloomberg

If they were smart, they would take the recent run up in the stock and do a secondary offering to pay off the $58 billion in debt it is expected to have, and say thank you for the AI hype the market has awarded the stock, rightly or wrongly.

Hock Tan is a smart guy, but I think he would be even brighter if he did a secondary offering, and for less than 10% of the company’s value, he could wipe out all of its debt. The option holders may not like it, but that is not his problem.

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Image Source: Bloomberg

Spreads

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Image Source: Bloomberg

Meanwhile, credit spreads continue to ease, and that is also helping to keep these equity markets lifted. The odd part is that, given where the dollar is, credit spreads seem historically lower since 2021.

The data shows a correlation of 0.70 with an R^2 of 0.50 between the USD/CAD and the CDX HY Index; both solid numbers, and yet, we are out on an island at this point, but with both the CDX high yield index moving lower as the USD/CAD moves higher, implying dollar strength. Based on this, I would have thought that credit spreads would be around 400 to 450. But it is just not happening, and I do not know why.

Nasdaq 100

As previously discussed on Thursday, the Nasdaq was able to gap higher on Friday and move above resistance at its Bollinger band, and it appears to be heading towards the upper trend line of the rising broadening wedge, which comes at around 18,450.

We will have to see what happens once we arrive at that point. That would be the third touching point in the pattern on the uptrend line, and it would mean either the pattern could break out and the advance may continue, or it would mark a turning point where the index could head back to 17,450.

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The XLK has a similar pattern, and it hit resistance on Friday. So, the ETF needs to gap higher on Monday and resistance needs to be taken out. Otherwise, it seems obvious that we would likely see it reverse at some point and start the process of filling the gap at $199.

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Finally, CPI swaps are pricing a 3% year-over-year inflation rate through June. That was where the inflation was in June 2023. So much for the progress.

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Image Source: Bloomberg

Anyway, enjoy tomorrow, as the rest of the week will only get increasingly more busy.

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